First Shanghai IPO of 2010 is an encouraging flop

By Wei Gu
January 28, 2010

Shanghai has had its first new issues disaster. XD Electric fell 1.4 percent on its first day of trading. That might not sound so bad, until you consider that Chinese initial public offerings in the last six months rose an average 80 percent on their first day. It might be a welcome sign that China’s stock market investors are become more discerning.

XD Electric, the first IPO of 2010, suffered from two headwinds. One was a general market pull-back on fears China will begin monetary tightening. The Shanghai Composite Index has fallen 5 percent since the electrical equipment maker priced its shares a week ago, with heavy equipment firms down 8 percent. XD Electric was priced at the top of its indicated range, a 26 percent price-to-earnings premium to the market. Taking that into account, XD Electric’s performance is not as bad as it looks.

Chinese investors will be quick to point their fingers too at the securities regulator for rushing too many companies to the market in its effort to cool asset prices. China is unique in that regulator, not the market, plays a main role in deciding whether companies can raise money. In the second half of 2009 alone, 111 companies came to the market. Some 10,000 more are still eligible, according to the Shanghai Stock Exchange.

Hopefully, the regulator will hold its nerve despite this rare first-day flop. Tradable equities still account for only a little more than a third of China’s GDP, while total loans outstanding are close to 120 percent of GDP, higher than the global average. Increased supply of new stocks should help bring down the market’s volatility, and reduce companies’ reliance on banks. Better to have more IPOs than pricier IPOs.

It’s too early to say whether XD Electric was merely unlucky. What seems like investors’ moment of clarity may be nothing more than jitters over China’s falling markets. But if Shanghai is to become a fully functioning market, first-day frenzies must become a thing of the past. If investors must work harder for their returns, so be it.

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